Friday, February 26, 2010

The Geithner Countdown

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

It's been no secret that I am not fan of Treasury Secretary Tim Geithner. Long-time readers remember that I assigned a lot of blame for the collapse of Wall Street on Mr. Geithner when he headed the New York Fed. What I thought was unfathomable was how President Obama could possibly promote this man to a higher office when he basically let Wall Street explode with toxic assets and leverage, and then implode to the detriment of Main Street.

I said I would be shocked if he lasted four years and now it will be interesting to see if he even makes it two years. That was on my on list of 11 Shockers for 2010. Maybe Goldman Sachs hires him as a "thank you" for the tens of billions he helped them make as a result of the crisis? That would certainly be a shocker! And reverse the trend of former Goldman folks into powerful positions in the government.

I remember when the AIG bailout was being discussed and all of the moving parts involved. Bernanke, Paulson, Geithner, Blankfein, etc. Although I was in favor of saving AIG at the time, given the facts presented, I will clearly and definitely state that if I knew then, what I know now, AIG should have been left to fail.

The financial system and economy would have taken a tremendous blow, but one year later, we would have been on the road to a real and sustainable recovery, not this government sponsored, public rescue of the biggest institutions held together with duct tape and paper clips, much to the detriment of small business. With all good intentions, the Bush administration made a mistake in how AIG was saved. You can add that to the list of screw ups, like allowing five investment banks to leverage 40 times!

What reopened old wounds regarding Geithner was first, his comment on December 23 that "there would be no second wave of the crisis" and then one day later that the U.S. government would unconditionally support Fannie Mae and Freddie Mac. There's no way it was pure coincidence that he chose the quietest time of year when so many investors and media are tending to holiday matters to offer such important comments.

The fact that this man presided over the banks and investment banks and totally dropped the ball is the exact opposite of the meteorologists calling for 10-20 inches here and only getting light snow. Now, he says that another wave of the crisis can't happen? The skeptic in me has just raised the alert level!

Second, and even more infuriating, is something I mentioned during the nationalization of Fannie and Freddie in the summer of 2008. At the time, Paulson and the Bush administration said the cost of the rescue would be contained to $100B at first, with much less being initially deployed. But the more the press dug, the more the public realized that this could become a trillion dollar nightmare in the worst case scenario. I think I wrote about a potential $500B price tag when all was said and done.

Now Tim Geithner comes out and pledges unlimited support from the U.S. taxpayer for Fannie and Freddie? How can this be? Where does it end? Does it ever end? These government sponsored enterprises had admirable intentions when they were created, but they ended up poisoned by politics as they became the two largest hedge funds in the world that must eventually be unwound. For now, the government needs to find a way to slowly reduce the size of the entities and their role in the mortgage market.

Long before Tim Geithner steps downs, I fully expect trial balloons to be floated on his replacement. While former New Jersey Governor and Goldman Sachs CEO John Corzine may be the most qualified, it would be hard to believe that people would tolerate it, given the perceived favoritism Goldman has received over the past few years.

Please feel to email me with any questions or comments at

Until next time…

Paul Schatz

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